Half Year 2019 B&M European Value Retail SA Earnings Call
Nov 13, 2018 AM UTC
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BME.L - B&M European Value Retail SA
Half Year 2019 B&M European Value Retail SA Earnings Call
Nov 13, 2018 / 08:30AM GMT
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Corporate Participants
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* Paul Andrew McDonald
B&M European Value Retail S.A. - CFO & Executive Director
* Sundeep Arora
B&M European Value Retail S.A. - CEO & Executive Director
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Conference Call Participants
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* Adam Gareth Cochrane
Citigroup Inc, Research Division - Director
* Benedict Anthony John Hernaman Hunt
Investec Bank plc, Research Division - Research Analyst
* Charles Allen
Bloomberg Intelligence - Senior Consumer Analyst
* Geoffrey Frith Ruddell
Morgan Stanley, Research Division - MD
* Jonathan Pritchard
Peel Hunt LLP, Research Division - Retail Analyst
* Richard B. Chamberlain
RBC Capital Markets, LLC, Research Division - MD of Consumer Retail
* Simon William George Irwin
Crédit Suisse AG, Research Division - Director
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Presentation
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [1]
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So I'll set the highlights, if I may, and then I'll pass over to Paul, our CFO, in the usual manner. And then we'll come back (inaudible) around the numbers at this point (inaudible).
Before we start, can I just clarify that now that the group has got 4 different retail fascias that we are going to refer to them separately so as to avoid any confusion. So we'll refer to B&M as the core fascia that you know here in the U.K., Heron Foods as our convenience store operations here in the U.K. and, of course, Hull and
(technical difficulty)
Going to B&M first. A steady -- a pleasing first half in the sense that its EBITDA grew by 12% year-on-year, and that was a function of the fact that, whilst sales were sluggish over the end of the second half, that was primarily because we had such a good rate of sell-through in the first quarter that, actually, we didn't have a lot of product to put into our July/August end-of-season sales. That's a good thing. It's not a bad thing. And so hence, you get a 12% EBITDA performance on the previous year whilst your revenues increased at a more moderate 7%.
The new-store program is progressing very well. In fact we are, this morning, giving guidance to a higher number than previously guided. And so you'll see that we've been opening stores across B&M, Heron and Jawoll, but you'll hear later that there's yet more to come in the second half.
I'll be talking in some detail about the strategic rationale for our acquisition of Babou. I'll come back to that. But overall, the business is performing in a stable, pleasing manner, particularly given the more challenging conditions here in the U.K. that we find ourselves in.
With that, I'll pass over to Paul.
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Paul Andrew McDonald, B&M European Value Retail S.A. - CFO & Executive Director [2]
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Thanks, Simon. Good morning, everybody. Just in time -- slightly less time on this discussion. Here we go. Just talking you through some of the -- clearly, in terms of the main elements of the P&L. Clearly saw group revenue grow just over 16% -- group EBITDA 30.5%, and over the next few slides, we'll just chat you through some of these, the moving parts in terms of how we've achieved that.
If I firstly move on to revenues. You just click on Slide 5. So clearly that we've moved from GBP 1.35 billion to GBP 1.563 billion. Just in terms of the key moving element, as always, the new-store program is a key element of that growth in which the new stores have delivered just over GBP 80 million of sales in the first half, although within that actually, you see that the annualization, the FY '18 stores and then equally the FY '19 stores and probably I'd just kind of point to detail. Although in the new B&M -- core B&M business, we opened 22 new stores, they're actually very back-end loaded, and in fact, 14 of the 22 opening happened in August and September. So in terms of the actual space -- in terms of space contribution in the half, it's probably been one of the lower ones we've had over -- if you look back at the results, one of the lower ones, although clearly similar total numbers still for the year, we're kind of equally going to do around about 58 stores in year, briefly, and to state and certainly the first half, they were particularly back-end loaded.
The other thing I'd like to pick up in terms of the present -- Sorry, something wrong with the slide there. Not too sure what's happened there. Let me -- in terms of the [our] sales, if you look in the presentation decks -- obviously, all the sales across the half are broadly flat but equally just not -- obviously we got enough to get the Easter week that we lost, which cost around about GBP 10 million of sales and the rest of the quarter around about GBP 11 million [of consensus] of LFL sales. In terms of Germany, slightly positive LFL sales growth across the quarter, and a little bit to the kind of new-store growth as well.
And probably on the -- clearly, one of the real positives in the half as well actually has been the performance of Heron. Heron delivered GBP 128 million of sales of which GBP 121 million related to that period last year where we didn't own Heron between April and the end of July. So in the period since -- since the period over the August/September comparable period here against the new-store growth were equally baked also continues to grow that LFL sales in [perceived robustly] as well.
Moving on to EBITDA. Yet again, the values have gone wrong on my such slides for some reason, but let me talk you through the numbers. Yet again, key driver of the B&M business is the new-store growth. So yet again, if you look at the FY '18 stores delivering GBP 8 million of contribution and a further just GBP 1.5 million from the FY '19 stores. Yet again just -- in terms of both sets of stores, the FY '18 stores are continued to grow very well, and yet again, the fact that there's only GBP 1.4 million contribution from the FY '19 stores is just the fact of function, the fact they were back-end loaded as opposed to those stores being -- the stores themselves trading perfectly well, very happy with it and continue to be very happy with the sales we have from them.
These other elements in terms of growth is we actually return to the core B&M business itself. We delivered -- in terms of our LFL store base, we delivered GBP 7.5 million of EBITDA growth from those stores. If you compare that to the last year, if you look, in fact, at last year's presentation, despite the fact we achieved 7% LFL sales growth in the first half of last year, we only actually achieved just GBP 6.2 million of LFL growth. So back to this function that's the very strong margin and sell-through that we saw in terms of the -- particularly on the gardening range, certainly in terms of our cash gross margin, the cash gross margin from those stores were very strong and equally, despite the lower LFL, we've actually delivered a stronger cash EBITDA from those LFL stores.
A little bit of noise around one of the other factors in terms of transport and distribution cost. I'll fill you in a bit more on the cost slide. There's a little bit of pressure around particularly around wages and fuel cost increases that we've seen.
The -- in terms of Germany itself, Germany was GBP 4.8 million less than the previous half at just over GBP 1.1 million of EBITDA. If you remember, we're going through this period where we are just basically clear -- accelerating the clearance of some of the discontinued lines from -- that we kind of previously brought ahead of the new B&M ranges coming into Jawoll. And equally, we generated -- a strong performance at Heron. We generated over GBP 7.5 million of EBITDA.
Just to give you a little bit more color in terms of the LFLs. Overall for the half, we were flat LFL in the core B&M business, although that was a very strong performance in -- a stronger performance in H1 of 1 -- plus 1.6% in Q1 and minus 1.6% in Q2. The main driver of that really was almost the -- there's a very strong gardening ranges. We had an exceptionally good summer and particularly early part of the summer, and effectively, we sold out the stock. If you went -- if you compare that to last year when the weather in the early part of Q1 in FY '18 was not as great, we had a pretty big kind of clearance sale. So effectively, once you kind of sell through that stuff, we brought through -- we brought forward some of our autumn winter products, which clearly sells less well at that particular time of year given the temperature was still 80 degrees. But equally, we're -- to gross margin, it's been hugely beneficial from a cash gross margin -- in terms of the categories, grocery and FMCG continued to remain fairly very strong in terms of achieving LFL sales growth and in terms of -- the starts of the new -- start of Q3, we've seen a steady start in terms of Q3.
In terms of the gross margin performance. Overall group margin was flat with last year, although actually breaking down into the individual components of that is that in terms of the core B&M business, actually, we've seen gross margin growth of 53 basis points. And that is predominantly almost entirely as a result of that very strong sell-through on kind of gardening. But even on other areas, be it kind of things like paddling pools, water pistols, all those -- anything which is outdoor related. So over through very, very quickly, and therefore, we were able to achieve a lot more sales at kind of full price compared to the prior year.
The other fact that we are continuing to see is that we've been seeing this for probably around 18 months is the fact we're actually -- the mix is still shifting slightly towards kind of grocery and FMCG. The consumer is certainly still continued to buy and seek out value on those particular types of products, and we're considering to see that mix change slightly towards favored grocery and FMCG.
In terms of Heron, we saw a little bit of the overall group margins there we're impacted to be about 16 basis points just on the simple fact that actually Heron has slightly lower gross margin in that business compared to the core B&M business. And the big factor kind of described earlier is the kind of the Jawoll margins. And the Jawoll margins were nearly 300 basis points lower than last year, which is all just predominantly associated with risk, accelerated clearance of those discontinued lines.
In terms of our kind of outlook in terms of FY '19, obviously, a strong quarter in the U.K. and in relation to B&M, equally in terms of the outstand for the full year -- a, it depends where we -- in terms of the overall mix in terms of are we going to see a continued shift towards grocery and FMCG, and then secondly, the clearance lines on -- in terms of our clearance activity on toys and seasonal products will be a key determining factor.
Moving on to -- go back a page. Good. Moving on to overall operating costs for the group. I'd like to again break it down to the key elements. In terms of the B&M operating costs, we were 11 basis points higher than last year. Although, in terms of some of the moving costs around that, store costs. We've seen some efficiencies around store costs. Now the operation seems -- continued to do a very good job in mitigating the impact of the living wage. So we're certainly seeing -- we certainly managed to see some efficiencies in our store cost. Although equally, I refer to kind of transport and distribution area. And probably the one area we are seeing a headwind is in transport and distribution. Fuel prices increasing significantly higher than last year and also in terms of kind of colleague wages, again, we were all starting to see some inflationary pressures, particularly in transport and distribution.
Germany's operating costs, 159 basis points higher than last year. A couple of things we have invested more in terms of the new management team in terms of a new kind of retail operations director, obviously new CEO, distribution director. There's been some additional fixed cost put into that business as well -- fundamentally as well as some kind of cost pressures in terms of store wages, whereas, the German business has less ability to flex those store wages.
In terms of our full periods of Heron ownership, we've seen some operating leverage from last year, and the cost compared to last year are 97 basis points lower than last year and, clearly, the strong LFL sales that we've seen from Heron has helped drive some operating efficiencies and depreciation broadly in line with expectations just effectively, obviously, the full year impact of having Heron in the numbers and their higher depreciation charge leads to an overall higher depreciation charges potential sales.
In terms of interest expenses, only really one thing to think. Obviously, following the acquisition of Babou, we put a little bit of additional bank debt in there, so I'd expect our full year interest to be around about GBP 23 million.
Cash flow. In terms of cash flows -- the business is very strong in terms of cash flow. You've probably seen our operating cash flow had actually grown by kind of nearly 50% in the half. That's -- a lot of that has been obviously driven by both the EBITDA growth that we've seen and equally in terms of working capital. The -- in terms of our working capital efficiencies. One of the slight nuances -- because this is -- because last year was a 53rd-week year, at the end of the half is actually 1 week later, so that -- as a result of that, we actually paid our VAT quarterly payments in September this year and rents were also paid in September this year, which actually dropped into October last year, which is about GBP 35 million of cash flow. So other than those actually other slight timing differences, the cash flow fundamentally would have been GBP 35 million better than shown on here. Yet again, if you look at the overall leverage, we still managed to delever to 2x. And in terms of the full year, we would expect to be around about 1.9x subject to when the sale and leaseback transaction actually happens in terms of effort.
So I think just moving over to Simon.
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [3]
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Thank you, Paul. Well done to [buffalo] through that despite the fact Home Bargains has really been playing with our presentation overnight. For those listening in, we will, of course, get those slides corrected very, very quickly.
So let me say a few words about the U.K. market as we observe it. I think you'll be unsurprised to hear that the macro for U.K. retail is mixed, sluggish, challenging, just as many down months as there are positive months. But what we shared for the first time with investors is, on a weekly basis, how the first half panned out. And you can see very visually what we're talking about in terms of the impact of there just not being that much product around us for the August sale. And I repeat myself. That's not a bad thing. It's a good thing.
So you'll see in those weeks where we would typically that time last year have patio sets, barbecues still for sale at cost. This year, we just didn't have them. Bad for like-for-like sales but very good for margin as you heard this morning. And then as you come out of that August sale period, business returns as usual.
And what these products on the right-hand side are trying to get across is that there are 3 messages. First of all, we had a great record season on outdoor living, barbecues, paddling pools, patio sets. Like it or not, our homewares and indoor adornment isn't particularly attractive to consumers when you've got a record summer. There won't be outdoor stuff. They're spending their money on outdoor living, and so that has been sluggish. But one constant, and it's been going on for about 18 months to 2 years now -- one constant is that our grocery is resonating well with consumers, and we continue to outperform on our grocery offer. We're maintaining the price gap versus the supermarkets, and they are buying our grocery from us.
Moving on to the all-important store rollout at B&M. The good news this morning is that we will achieve 58 openings this year as opposed to the 40 to 50 that we had previously guided. That's a reflection of the large number of opportunities out there in the market. It's clearly a buyer's market. And I'd also share with you that, 3 days ago, we opened our 600th store of B&M. It opened in a town called Tonbridge which is in Kent, which is firmly Southeast of the U.K. And this might sound like it's been engineered. I assure you it's not. No advertising support. No stunt marketing. No TVs at 100 pounds. But actually, our 600th store opening in Tonbridge on the Saturday 3 days ago was our best-ever opening day across 580 openings that we've had under my leadership at B&M. So I think what that says is that the model resonates as strongly as it ever has done with U.K. consumers, and it also says that it's hugely popular in those parts of the U.K., such as Tonbridge, which is effectively London-commuter territory. It resonates just as well there as it does in our heartland of, say, Greater Manchester or Merseyside.
Final point of detail. There are 2 store closures in the half that we're reporting on. And what that is, is very early legacy stores from 10 years ago that you'd never open today. They're too small or in 2 tertiary a location. And typically, we are either relocating or just closing it to lease expiry in full anticipation of a better site coming up in that town over the months or years to come.
Turning to Heron Foods. I'm just delighted with that acquisition. It's now annualizing its early wins in terms of like-for-like sales. And cutting to the chase in terms of turnover, for the first year of its ownership under the B&M group, it's been achieving high single-digit like-for-likes, and right now, current trading, it's still achieving mid-single-digit like-for-likes even though it's annualizing periods of time when it was doing plus 9%, plus 10% like-for-like. So it's a stable business, performing well. And the number to draw your attention to is the fact that we are confident that, this year -- this financial year, the business will open 20 new stores.
Just before we move away from the U.K., final piece that I want to touch on is the new distribution center in the South. Building work is now firmly underway. If you enter the site today, you'd see the frame of the building actually out of the ground and assembled. And we expect to go live in January 2020, which allows us approximately 1 year from now to finish the build and then to fit out this site with pallet racking, sprinklers, M&E, et cetera. But the important point for those of you modeling our cash flows, we are retaining our capital-light model and fully expect to sell the building in the first half of next financial year in order to immediately recoup all the CapEx that's gone out to get it built.
Let's now turn to our overseas business in Germany, which clearly has had a challenging half, for that's something that we'd like to think that we have been talking to investors about in terms of this being the year that we decisively transition out of products sourced locally that just weren't good enough and moving to products sourced from the B&M supply chain that are that much more compelling in terms of price and presentation and packaging and quality, et cetera. It's painful in terms of gross margin, but we think it's necessary per the pain in order to come out on the other side in a much healthier place and, therefore, then be able to carry on opening stores.
The point of detail that I'll share with you is that one of the key factors in the underperformance in terms of gross margin alongside the clearance activity that's taking place on discontinued products is that they -- we executed our garden range disappointingly this year. We should've had a much better gardening season given the great conditions. But what I can assure you is that I've personally seen the gardening range for 2019. It's relying much more on the B&M factories and B&M supply base, and it looks fantastic. And we are generally very, very confident that we're just going to knock it out the park in terms of spring summer 2019 because the product is just that much better than what we had on our shelves this summer.
So let's now turn to the French business, Babou, which you all will be aware of that probably have a lot of questions on. I think the first thing that would be useful will be just to put it into context for some of you who may be unfamiliar with the other discount retailers in general merchandise in France. A lot of you will be familiar with Action by virtue of the fact that it's owned by 3i, and they provide a fair bit of disclosure on how successful the Action business has been in France over the last few years.
But what this slide demonstrates is that there are a number of operators in the market, all the reasonable size and some of which are doing very well indeed. A couple of shoutouts for a couple that are particularly close to the Babou proposition La Foir'Fouille, the 240-store chain with GBP 600 million revenues. I mentioned that because our new Chief Executive of Babou is the ex-trading-director of that business. He joined us 9, 10 months ago now, and he's been working in B&M, getting up to speed on our strengths, our supply base so that when he was given the keys to Babou, he wa's able to act decisively and quickly in order to bring the model closer to that of B&M.
Another business that I point out is Stokomani, which has a similar number of stores to Babou, 87 versus our 95. Their store size is very similar indeed to ours of Babou. Very similar store size and store location, and it's a nicely profitable business with 11% EBITDA.
So a little bit about the infrastructure that we've acquired. So the crucial asset in this business, one that's drawn us to this transaction, is the fact that they have 95 stores averaging some 30,000 square feet of sales. And having seen a lot of those stores, they are very well located in the sort of locations that we would want, for example, a B&M Homestore to be located in. They're typically facing a large hypermarket or in a good location on an established retail park or on a stand-alone location but on a main arterial road.
By virtue of the fact that Babou has been in business for 40 years, it has, in a sense, first-mover advantage in its real estate. A lot of its stores are exactly where you'd want them to be in that town, and that's because they were there first. They've been doing this for 40 years. A point of detail, like our own business, there are no freeholds in Babou, which is a capital-light model where every property is leased.
Another point of detail is that store operations are managed by local independent mandated managers. That's a model that works in France. It's used, for example, by GiFi, one of the retailers on the earlier slide that is very profitable. And under that model, a local typically husband-and-wife team operate the store. They take care of staffing in-store, cleaning and security. But just to be very clear, this is not a franchise. This is a model where all the inventory, the tills, the sign above the door, the shop equipment, the lease all belongs to Babou. It's an efficient way of running the story in the French market, and it does work there.
The business is genuinely national. You'll see that the stores are across France, and its distribution center is in the middle of France.
In a nutshell, for a sum of money that represents something like 4 months' worth of our EBITDA, we were able to acquire 2.5 million square feet of retail space and established working distribution center along with these IT and head-office processes to allow us to enter the French market in a really interesting way at relatively low cost and certainly a lot more quickly than we could have done on a greenfield basis where you're opening up one first store at a time.
And so as we think about the business, I would share with you that it actually has taken 3 years to get to the point of transacting. The family that sold the business have owned it for 40 years. And it was important to them that the purchaser was a good long-term, logical, financially sound future parent company.
The feedback from our colleagues in France so far over the 3, 4 weeks that we've owned this business has been really positive. They've been extremely receptive to what we want to do to the product range, and they entirely agree with what we think is the right way forward for that business.
The other thing that I would emphasize is that, perhaps having learned from our experience in experience in Germany, we've moved a lot more decisively and a lot more quickly in terms of refining the product range to play to the strength of the B&M group.
Cedric has been with us for 10 months already. Even on the day we signed the contract, we already had draft orders ready to place with factories for over 3,000 different product lines. I can tell you that, as of this morning, not -- those 3,000 product lines, not are they ready to place, but actually, those orders are now placed. Those orders are booked for the factories, then they're getting on with it. So we're going to act quickly over the next 12 months, if not sooner. What you see in a Babou store will make you think of a B&M Homestore.
Let me also give you an insight into its customers and its products, and I think you'll immediately see the resonances with the B&M business. The Babou shopper is predominantly female in exactly the same way as the B&M shopper is. It serves a spectrum of socioeconomic demographics, but of course, its biased towards those who need a bargain rather than just those who want a bargain. And of course, it also serves, as we do, a section of the population that is either retired or not currently in employment.
In terms of what it sells today, over half -- or just about half of what it sells is firmly in the categories that we're already in: general merchandise, housewares, DIY, et cetera. Like ourselves, it has an important seasonal offer, and that's something that we would look to expand given our strength in those categories.
Unlike ourselves, it currently has 41% of its sales in clothing and footwear, but we expect that to reduce as we bring in more B&M products and also as we introduce a limited range of FMCG and grocery in order to assist with the average basket and footfall in exactly the same way that, that works in the U.K. and in exactly the same way that that's been working so well for Action in France over the last few years. I think it's worth reflecting on the fact that Action's success in France over the last few years demonstrates the appeal of a sharper price proposition to French consumers in exactly the same way that, that sharper price proposition has appealed to the British consumer over a similar time frame.
We give you, on Slide 23, some financial history for the business. So as I remarked earlier, it's about GBP 350 million of revenues, and over the last 3 years, it's been a pretty static revenue line and, indeed, store estate. And what you'll see from the EBITDA and the margin dynamic here is that the business, under previous ownership, was focused on maximizing margin whilst accepting negative like-for-likes.
We don't think that's sustainable. We think if you're a discounter, concentrating on expanding your gross margin whilst accepting revenue folds means that, eventually, you stop being a discounter. And so under our ownership, clearly, we're looking to reinvent the product range, get back to positive like-for-like but, through our supply chain, deliver a margin that's enough to deliver healthy EBITDA margins for the group.
Let's not shy away from the fact that, in terms of its trading year-to-date, it's been having a very tough year indeed. A large part of that pain has been in clothing. But of course, that is the reason why we were able to acquire the asset at a very modest price relative to its size and what we got for it.
And so at the risk of repeating myself, as we look forward to what is going to happen in that business under our management and ownership, it's all about the fact that we have learned from our German experience, and we're going to act decisively and quickly to do all the things that you see on the left side of the page.
It's not just Cedric who's been waiting on the sidelines for this business. There is a broader team of ex-co-level executives and, indeed, buyers who were recruited prior to the acquisition and either have started already or indeed are starting over literally the next few weeks.
So to summarize, how do we feel about the remainder of this financial year? So what we'd say about the U.K. is that it is stable. It's not easy for retailers at the moment in the U.K., but certainly, we're very well placed to prosper in that uncertain and tough environment. Clearly as Paul mentioned, it's all to pay for yet in terms of the all-important golden quarter. We have Christmas decorations and toys, et cetera, in stores. Products looks great. It's in stock. It's ready to sell.
I'd say in terms of Heron, that business just doesn't really give me a lot of headaches. It's a very stable business, and it's performing well. But the really positive news in terms of the U.K. business is that, in terms of the store -- the new-store opportunities, we've never had it so good. We're as busy as we've ever been in that particular part of our business and some really good signs are coming forward.
In terms of Germany, we're very busy, and we are really getting into this posits of transition, moving from the product ranges of last year. And we are excited by the early response to some of the product ranges that have been brought in from the B&M supply chain already this quarter. I've already referenced, that as we look forward to 2019, we are very confident that the product's going to look amazing compared to, frankly, what we had in our shelves over the last 6 months.
And then finally, in terms of France, we're very pleased with the acquisition. The space is very good. The teams there are very positive and excited about what we bring to that business, and certainly, it's a very important milestone for us in terms of our medium-term and long-term aspiration to be a pan-European general merchandise discounter as we've been very clear from the day that we IPO-ed.
So thank you for that, and let's go straight to some questions, if we may.
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Questions and Answers
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Benedict Anthony John Hernaman Hunt, Investec Bank plc, Research Division - Research Analyst [1]
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Ben Hunt from Investec. Two questions. The first one on the U.K. You've got quite a number of stores opened in the second half, and your inventory levels, they're quite stable as they are this half. Unless you bought a new (inaudible) with the range as earlier, is there a risk that you could fall short of stock in second half? And the second question on Babou. To what extent would the FMCG grocery categories can you keep that price differential that you do against the seafood markets in the U.K. How would you be able to -- what would be the price governing (inaudible)?
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [2]
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Sure. A good question. So in terms of inventory for the U.K. business, we have good visibility of when those stores are opening, and as you've heard, they are back-end loaded. So our import teams have had enough notice of those openings in order to make sure they have the right inventory. I mean, at the risk of pointing out the obvious, one of the positives of the fact that this year's program is so back-end loaded is that you're going to see the real benefit in the first half of next financial year just by virtue of the calendar because you'll have the full year impact of all the openings this year that are happening at the very end of the year and, indeed, right now. I mean, this current quarter, we'd have opened 20 stores in 12 weeks. We've never done that before. And in terms of the grocery in France, Foir'Fouille, the business that Cedric worked at previously, also sells those products. And I'll show you that one of the buyers that was the day-to-day person responsible for that buying has already joined our business. And I'd also reference the fact that Action do very well on that product as well. So it's clearly possible to (inaudible) their product to the consumer at a price that is different to what they see in the hypermarket.
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Jonathan Pritchard, Peel Hunt LLP, Research Division - Retail Analyst [3]
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Jonathan Pritchard at Peel Hunt. I think both of these are on grocery. B&M Express. You could have the bullet points on there, but you went past the 27 stores. Now that's sort of 1 in 10 in the Heron chain. It's actually under another name. What's the thinking here? Could we perhaps not see Heron on our streets on a 2-year view? What's the customer's response been to the fascia name and what the change in the stores as a part of that form ABC? And then what's the latest on the Frozen B&M [hotels] -- sorry, just why has grocery been so strong? You've maintained your price gap over the competition but your grocery in the mix has been strong. What's the attraction of grocery relative to where we were 18 months ago.
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [4]
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Good morning. So in terms of B&M Express, our rationale is that, this week, something like 4 million to 5 million British consumers will go to a B&M. And it can't be a bad thing if, over a period of time, there are 200 more shopfronts that have that large in-your-face vivid converts that remind them of B&M. Remember, we're not a business that relies upon advertising. It's word-of-mouth, and it's just the physical appearance of our stores that creates brand recognition. So we think if there are not 600 but 800 points of sale under the B&M banner, that's good for the brand. And the reason why we call it a trial, though, is we want to make sure that, in doing so, we don't harm the business in any way. Early indications are that it doesn't. Turning to your second question in terms of the deployment of frozen and chilled at B&M, that's as it was when we last updated, which is that we are waiting for the Bedford facility to become operational before we can roll out frozen and chilled to more B&M stores. And then on the final question on grocery, I think it just speaks to the inherent advantages of the model of limited assortment discounting that our grocery buyers -- our grocery range retains its gap over the full-service supermarkets. And I think it speaks to the fact that the consumer wants to save money in today's environment. And so if they can, they will do.
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Jonathan Pritchard, Peel Hunt LLP, Research Division - Retail Analyst [5]
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Per that B&M point -- B&M Express, oh you can see the (inaudible) in those stores literally (inaudible) main (inaudible)
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [6]
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It's almost entirely rebranding rather than anything changed in the product range. Because what I'd already shared -- what I'd share with you is that, already, over the last 12 months, half of what they sell is the same range as in the B&M on the ambient grocery. The ambient grocery range inherent is effectively the B&M ambient grocery range. So why not call it the same thing? There was a question towards the front of the room.
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Geoffrey Frith Ruddell, Morgan Stanley, Research Division - MD [7]
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Geoff Ruddell, Morgan Stanley. And 2 very different questions, please. First one, IFRS 16, there's a comment in the pack that says the amortization and interest costs are likely to (inaudible) next year and next years. Could you give us some kind of quantification? I appreciate that (inaudible) Is this a GBP 2 million or GBP 3 million issue or GBP 20 million or GBP 30 million issue (inaudible) ?
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [8]
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I mean, we've made lot of progress in terms of actually quantifying this. There are still a few sort of accounting technicalities around this, Geoff, which is -- one of which is just a green kind of discount rate, which makes a big difference. It depends on what you get on the discount rank. And equally, there's also a little bit of slightly boring accounting things. It's actually the date at which you start these from, whether you go back retrospectively to the date of the lease or actually the acquisition date of B&M by our holding company in March 2013. So I think most people in the market are yet to quantify it in absolute detail. I think it is just been a function of the complexity of our IFRS 16, actually. So we're getting close to getting there, Geoff, but at this stage, not in terms of actually giving out a precise figure at this point.
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Geoffrey Frith Ruddell, Morgan Stanley, Research Division - MD [9]
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(inaudible) a choice of a GBP 2 million or GBP 3 million or a GBP 20 million or GBP 30 million?
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [10]
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I'll be fair. I wouldn't like to -- I mean, certainly, actually things like discount rates are absolutely to sort of nail down with our auditors. It just makes a big difference to tell them (inaudible) sent then.
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Geoffrey Frith Ruddell, Morgan Stanley, Research Division - MD [11]
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And then completely differently: mandated managers. What sort of powers do they have that an ordinary B&M store manager wouldn't have. I mean, for example, do they have any choice on ranging or pricing or where things are located?
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [12]
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So in a nutshell, they don't. The price file is all maintained centrally by ourselves. Only B&M-Babou product can be sold in the store. So it's probably more akin to a service provider than a franchisee in the sense that their responsibilities are more around the staffing of store colleagues, security and cleaning. They don't have influence over the price at which products are sold. So was that -- sorry. One minute (inaudible).
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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [13]
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Simon Irwin from Credit Suisse. Just looking at current trading, back to LFLs, sorry, at the half -- back to LFLs, food FMCG seemed to be strong and seasonal all sold through. So what is weak? And what are the implications for that obviously as we go into Christmas.
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [14]
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So let me answer the question by asking a question. You could be flat on gardening because it's all sold through and you didn't have product to sell in the sale, and at the margin, you probably bought that level of it because, last year, you have too much products going on sale. Is that strong or weak? I bring you back to the fact that the core B&M business through its EBITDA by 12% versus revenues by 7%. Let me give an example in terms of the current quarter. So Halloween. Halloween was negative like-for-like. But we made more cash margin because, last year, we went into sale in Halloween 4 days before Halloween. We have too much stock. This year, we didn't need to go into sale on Halloween. So there is an intrinsic tradeoff between gross margin and revenues, and the management team at B&M is focused on profit and not headline numbers around like-for-likes. And to answer your question more broadly, I don't want to shy away from one thing, which is, in terms of our home adornment proposition, we think we could do a better job of executing that. And we recently recruited a new buying controller for home, and her influence on that product range will be felt from March of next year onwards. So that has been one area of disappointment. Part of that might be the factor in the record summer. People aren't looking to adorn their home. They're looking to spend their money on outdoor activity. But that's one area that we think we could do better, and we've made the steps to deliver that.
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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [15]
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And (inaudible) you think Babou modeling over the next year or 18 months in the business (inaudible) profitable right now and obviously last in first thing. How should we think about the profit bridge between a steady state in 3 years' time.
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [16]
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(technical difficulty)
share with you that, at its peak, Babou was delivering GBP 50 million of EBITDA. And one of the slides we disclosed in the last financial year, we assessed their underlying EBITDA at the moment at around GBP 17 million. But certainly for the next 12 months, which I know is all quickly straddled 2 financial years, but for the next 12 months, we ask you not to model any meaningful or material incremental additional EBITDA for the group because, in that 12-month period, we need to put through a lot of change. Not so much on the cost side but much more around exiting ranges that we don't see as being attractive to the consumers going forward and replacing them with B&M products coming in. So don't model any incremental EBITDA at that level for the next 12 months, but certainly, if you look at that slide in terms of what some of its competitors are delivering,
(technical difficulty)
should we say 7% EBITDA up to 10%, 11% EBITDA, that would be the range of our aspiration.
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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [17]
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Okay. And then just in terms of the first half, second half, given that the -- given the 2, I mean, traditionally, is it a kind of first half peak business? Or is it more like Jawoll, which does better over the summer?
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [18]
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So the Babou stores don't have garden centers. So they will behave much more like the B&M model than the Jawoll model. So was there a question towards the middle in the back? Yes?
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Adam Gareth Cochrane, Citigroup Inc, Research Division - Director [19]
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Adam Cochrane, Citi. Just on what's wrong, Babou. How are you thinking about -- you're 40% of the range in clothing, so that is going to come down by a lot. That's a lot of space you're going to have to repeat reallocate. What exactly is it -- you mentioned no gardening offer. Is that the sort of thing you're going to put into those stores to try and replace that 40% from clothing. So I'm assuming you don't consider yourselves to be experts in clothing. And then secondly, we're hearing a little bit with regards China sourcing that, because of the tariffs coming in, we're seeing a lot of U.S. companies trying to place orders much more quickly to get them delivered before the tariffs come in, and they're finding some supply issues from that side. Is there anything that you're seeing that's very -- maybe cost precious from the Chinese supply base because of that? And then finally, I saw a little bit about a B&M brand trial in Germany. And is that really -- are going to tell me it's just a trial. But is that -- your thinking that the Jawoll name doesn't have that much resonance with the German consumer, therefore, it's worth trying to rebrand?
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [20]
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So in terms of the space currently given over to clothing in Babou, we want to repurpose some of that space towards seasonal. They don't do enough outdoor and garden in the summer, and also some of the bulkier B&M product around DIY, for example, paint or some furniture that could usually be deployed in that space. We expect clothing to go down to circa 25%. In other words, keep the best of what they have and also focus on the basics and the everyday essentials within clothing rather than try to be a fashion retailer. That's clearly not our skill set. In terms of your question on tariffs and U.S. companies, the second blanche is no. In fact, the dynamic that we're currently experiencing in the Far East is that factories that were previously happy just to focus on the U.S. market are now falling over themselves to find high-volume buyers in Europe, and we're getting some really interesting approaches from factories that previously didn't have the capacity or the inclination to deal with us. And then finally, yes, there is a trial store. It's in the Frankfurt area. On the 26th of November this year, it's going to open as B&M. The reason why that's taking place is that in that particular town, you're a long way away from a Babou -- sorry, Jawoll. And, of course -- so brand recognition in that town of Jawoll is nil. They've never heard of it. And so given that the store is going to be laid out and stocked with much more of the B&M-type product, we thought it would be an interesting trial, and that is the word to use, to explore how that's received. To not duck away from your broader question, what do we think about the Jawoll brand? If there comes a point of time where the product range within the store has moved on so much from what was, actually, changing the name to B&M is probably a good way of communicating that because, what I'd mention, is that all our German stores leave their local catchments, like most German retailers do, every couple of weeks. And so announcing the rebrand and what's in store is actually pretty straightforward, and it doesn't have any additional cost because you're already paying for that cost within the existing P&L.
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Adam Gareth Cochrane, Citigroup Inc, Research Division - Director [21]
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One final one, if I can. When you think about October, is sort of looking October/November flattish like-for-like. Is that consistent with where you thought you would be? And in terms of you talked about a tough comparison for the last year for October, does that change meaningfully into November and December just to get an idea of the Q3 profiles, please?
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [22]
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So last year's Q3 was a good Q3. The soft comp for us is Q4. If you remember, our Q4 included the Beast from the East, so March was horribly negative like-for-like. So that's where we have easier numbers to compare against. But how would I talk about current Q3 trading, the golden quarter? So the market is flat. Some of our competitors are going into panic discounts and promotional activity. We're not in that situation. And we are as focused on delivering healthy gross margin rather than just chasing flattering like-for-like sales.
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Charles Allen, Bloomberg Intelligence - Senior Consumer Analyst [23]
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It's Charles Allen from Bloomberg Intelligence. Just to come back to clothing, and you talked about 25%-plus will be in Babou. Many of your peers have clothing as a staple item in it. Do you see opportunity to bring clothing into both B&M and Jawoll?
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [24]
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We have no aspiration to enter the clothing market in the U.K. Our B&M business does do clothing, but it's the staples like underwear, socks, hats, gloves and scarves. No plans to become an apparel retailer in the U.K.
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Charles Allen, Bloomberg Intelligence - Senior Consumer Analyst [25]
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And so secondly is Babou, I think, has a loyalty card. And what do you see in the future for that?
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [26]
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So the B&M business has been very good at building its customer base without using loyalty cards or incentives on the premise that we're an everyday low price retailer, and you don't need a discount for a loyalty reward because our prices are the best out there. It's something that's under review. Watch this space. We will explore different techniques around what currently we've inherited. There were some questions upfront, but I (inaudible).
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Unidentified Analyst, [27]
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(inaudible) from Goldman Sachs. Two questions. In Jawoll, your merchandising your [signets] for 35% of supply chain. Understanding, what's the limit you're expecting it to go to? And if you can give a gross margin to finish OUS for getting from your supply chain. And second thing on Babou, what's the incremental CapEx we can expect as you roll out (inaudible).
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [28]
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So in terms of the Jawoll business, the general merchandise, sir, is being sourced through the B&M supply chain, is delivering a gross margin consistent with that of the U.K. business, in fact, a little bit better in some cases. And we could see the general merchandise being 50% sourced over a period of time from the B&M supply chain. It's currently about 35%. When we update the markets on our performance over the golden quarter, we plan to give you some real color and insights around the impact of the B&M sourcing on individual categories at Jawoll because the early signs are -- in those categories where the stock's here and is on shelves, it's selling much better than what was there previously. But we've just got this ongoing program of discontinuing legacy ranges. In terms of CapEx for Babou, Paul, are you ready to give some numbers on that? Or is that a work in progress?
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Paul Andrew McDonald, B&M European Value Retail S.A. - CFO & Executive Director [29]
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It's a work still in progress (inaudible).
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [30]
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It all depends on the rate at which we move from their existing shop equipment to the B&M supermarket shelves. The actual buildings are well invested: LED lighting, good flooring, M&E, heating, air conditioning is all fully invested. No real CapEx requirement. It's more around just simple supermarket shelving, and that's very much the hardest question. He'll do a few stores. He'll see what the payback is. And you'll do another sort of [socket] and see basis. There was one last question in front.
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Richard B. Chamberlain, RBC Capital Markets, LLC, Research Division - MD of Consumer Retail [31]
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Richard Chamberlain, RBC. Just a couple of things please. On the -- in the same that referenced currency hedging, Paul, are you doing anything extra on that front in the like (inaudible) Brexit volatility? And the second one just, Simon, picking up on your comments about Jawoll. You're seeing early indications of sales and new products are encouraging. Can you give us a little bit more color? I mean, does that any particular product categories you're seeing those indications in? Does that apply to seasonal as well as nonseasonal product?
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Paul Andrew McDonald, B&M European Value Retail S.A. - CFO & Executive Director [32]
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Our FX policy, Richard, I mean, traditionally we've nearly always basically hedged about 6 months. In light of -- I'm not really just kind of selling line with our buying cycle inclined in light of the risk, et cetera, we probably stated on the slide there, we've actually hedged out to September '19 so a little bit longer than we normally do just to make sure we're actually managing that risk, Richard, so slightly longer is the answer.
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Sundeep Arora, B&M European Value Retail S.A. - CEO & Executive Director [33]
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So the categories where we're able to get products in early were toys and electricals. And the like-for-like performance of those categories very high positive like-for-like, albeit they were off a low base. And so I can't emphasize enough the underperformance at an EBITDA level in Jawoll is surely the fact that we are selling off discontinued product at minus 50%, minus 70% prices because, as a board, we've decided, look, if you're going to make a success of Germany, let's act decisively and quickly rather than a prolonged period of trying to maximize every penny out of discontinued product. Now effectively, it's just blocking the shelves.
Very good. Thank you all for your interest and questions. Thank you.
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